Small-Cap Stock Investing
Versus Growth Stock Investing
Versus Value Stock Investing
What’s the best investing system?
I’ll tell you in a minute. But first I’d like you to study this chart—courtesy of Google Trends—that depicts the level of interest in investing.
Specifically, it depicts the popularity of search terms related to investing, like “stock”, “gold”, “fidelity”, “oil”, “stock market” and “scottrade.”
To me three patterns are evident in this chart.
First, interest in investing has shrunk over the past five years.
Second, interest in investing falls off in late December every year, and then pops higher in January.
Third, and most germane to today’s discussion, is that the two big spikes in the chart reveal that people become more interested in learning about investing (though not actually doing it) when bad things happen.
The late 2008 spike coincided with the end of the housing crash that threatened to bring down our banking system, while the mid-2011 spike coincided with the worst of the European debt crisis.
The reasons for this increased focus on investing in times of perceived crisis are simple.
Fear is a stronger emotion than greed, and the pain of loss is felt more deeply than the joy of gain.
Thus in the peak crisis moments of 2008 and 2011, people were hungry for news about investing because they were worried about their own assets and ultimately, their own safety.
You can see the dominance of fear-based thinking in the outside the investing world as well.
As I write this on Friday, for example, on a beautiful sunny afternoon, enormous amounts of attention are being paid to the coming “Frankenstorm,” which has the potential to devastate vast positions of the eastern seaboard.
At the same time, very little attention is being paid to the fact that Saturday will be a beautiful day!
The bottom line is that we humans are born and bred to notice danger and to act to protect ourselves from it.
Sadly, we’re not as well designed to notice opportunities for profit, particularly when doing so means running in the opposite direction from the herd.
Which takes us back to investing, and the task of identifying the best investing system.
Taking the human element out of the picture, the very best investing system is that which produces the best long-term returns, and that’s small-cap investing. A small-cap stock, by one definition, has a market cap of less than $2.5 billion and greater than $500 million, but there are no hard and fast rules.
According to Royce, which manages several small-cap mutual funds, since 1925, small-cap stocks have grown an average of 11.3% per year while the S&P 500 has grown 9.5%. That may not seem like a huge difference, but over time, the magic of compound growth yields major differences.
If you’d put $10,000 in the S&P 500 in 1925, your portfolio would now be worth more than $23 million, but if you’d invested in small-cap stocks, it would be worth more than $100 million!
And the trend continues today!
In fact, at Cabot, we have our own small-cap investing guru. His name is Tom Garrity, and he’s got a great track record.
Of the 31 stocks he’s recommended since the start of 2009, Tom still owns 20, with an average open profit of 31.50% per stock. He’s holding these because he's optimistic they can move higher from here. And he recommends a new stock every month.
Trouble is, you need a cast iron stomach and ice in your veins to tolerate the volatility of some of Tom’s small-cap stocks. Tom has these qualities, and those who follow his advice do very well.
But if you don’t have a cast iron stomach, small-cap investing is not the best investing system for you. If you let your feelings take control—it’s only human—you’ll find yourself selling at the exact bottom of one of those crisis points and then sitting on the sidelines as stocks rebound. And that’s no way to make money.
So if you’ve got an appetite for growth, but holding on through waterfall plunges is not your cup of tea, then Cabot Market Letter is probably your best choice. It’s our flagship publication, combining stock selection and market timing into a system that gets you into leading stocks for major market uptrends, but ushering you to the safety of cash when the environment turns nasty.
Big winners readers have enjoyed in recent years include Amazon.com, Baidu, eBay, Ulta Salon and First Solar.
Since the start of 2007, while investors in the S&P 500 have earned nothing but heartache, followers of Cabot Market Letter have earned an average of 8.3% per year. And a large part of that gain came from sitting in cash while the market was going down. That’s a great feeling!
Note: According to Hulbert Financial Digest, which tracks performance of investment newsletters a little differently, the Cabot Market Letter earned 5.6% annualized over the five years ending 9/30/12, while the Wilshire 5000 is up 1.3%%. That’s still a great difference, especially when you compound it.
I think it’s a great system (it’s been refined over the past 42 years), and if you haven’t seen it, I urge you to give it a try today.
But if you really can’t stand the volatility of stocks like these—even when most of the action is on the upside—then this is not the best investing system for you.
In that case, I recommend value investing.
Now as we all know, when it comes to value investing, the epitome of the breed today is Warren Buffett. Trouble is, Warren Buffett’s style isn’t exactly appropriate for smaller individual investors. Warren likes to buy the whole company (or at least controlling interest) and then simply hold it. He says, “Our favorite holding period is forever”.
If you’re like most investors, you’re probably counting on selling your investments during your retirement years, so you can’t invest like Warren. But you can invest like the guru who taught Warren, and that’s Benjamin Graham, author of the bibles of value investing, “Security Analysis” and “The Intelligent Investor.”
And the best way to do that is by following the very clear buy and sell advice in Cabot Benjamin Graham Value Letter, edited by Roy Ward.
Roy likes high-quality stocks that pay dividends, representing well-managed companies that are practically guaranteed to be in business, and larger, in the years ahead. But he only buys them when they’re on sale!
Recent recommendations of Roy include such stalwarts as Metlife, Omnicare, Xerox, Caterpillar, Schlumberger, Celgene and Dollar General.
And his results have been excellent!
Roy’s Classic Value Model has advanced 27.6% during the past 12 months compared to an increase of 23.8% for the Dow. Since its inception on 11/30/02, the Classic Model has achieved a total return, not including dividends, of 184.0% compared to a return of just 51.9% for the Dow Jones Industrial Average.
And Roy’s Modern Value Model—slightly more stable and growth-oriented—is up an amazing 43.7% during the past 12 months compared to an increase of 27.7% for the S&P 500. During the past decade, the Model has increased a remarkable 118.6% compared to an increase of 58.5% for the S&P 500. And the Model continues to set all-time highs!
And what if holding individual stocks makes you uneasy? What if what you really want a simple system for benefiting from market uptrends and avoiding market downtrends?
Then the best investing system for you is the Cabot ETF Investing System.
When you follow this system you invest in three or four ETF sectors (like health care or utilities or financials) when the market trend is favorable, and you retreat to the safety of cash when the market trend is unfavorable.
That way you avoid the risk of owning individual stocks, and you avoid the risk of being invested when the market is going down.
Yet you benefit by being in the most favorable sectors when the market is going up.
For example, followers of this system, guided by editor Robin Carpenter, bought four ETF sectors back on June 20, when the system signaled a buy. And they remained invested until October 23, when the system signaled a sell.
Result: again of 6.9% while the S&P 500 is up 5.7%. It doesn’t seem like a big difference, but it compounds over time, particularly if you’re sitting safely in cash during the market’s down periods.
Over the past five years, the system is up 27.9% while the S&P 500 is up 5.0%.
Over the past 10 years, the system is up 149.2% while the S&P 500 is up 91.9%.
If that sounds like the best investing system for you, I invite you to try it out.
Yours in pursuit of wisdom and wealth,
Editor of Cabot Stock of the Month
P.S. Life is full of choices, and I’m well aware that the choices we offer at Cabot may be a bit daunting. If you’re still confused, I suggest you visit our web site, or call to speak to a Customer Service Specialist at 978-745-5532.